Canada: M&A: Canadian Banks And Pension Funds Continued Trend Of Investment

The "Big Six" banks

In 2012, Canada's "big six" banks were fairly active on the M&A scene in transactions that included the TD Bank Group's acquisition of MBNA's credit card business from Bank of America, Scotiabank's acquisition of ING Bank of Canada and National Bank's acquisition of HSBC Canada's full service investment advisory business, and several Canadian banks rumored to be active in the auction for the non-U.S. operations of General Motors' former lending unit Ally Financial.

Underlying this behavior is two realities for leading Canadian banks which we expect to continue unabated in 2013: limited domestic growth opportunities and profitability of their domestic banking businesses and the well documented troubles of capital deficient U.S. and other foreign banks. The first of these will lead Canadian banks to enhance market share by continuing to complete acquisitions of assets domestically, where possible, while the second creates an opportunity to effect strategic acquisitions abroad to assist with global diversification and to enhance their global footprints abroad. Specifically, wealth management has become a priority for almost all of the big Canadian banks, and with a competitive Canadian market and a desire to align traditional Canadian banking with global wealth management, the trend of foreign acquisitions will likely continue in 2013 as these financial institutions look for opportunities for growth abroad. Recent examples include: Royal Bank of Canada's acquisition of the Latin American Caribbean and African international private banking business of Coutts in March 2012; Royal Bank of Canada's acquisition of Fortis Wealth Management Hong Kong Limited in November 2010; Royal Bank of Canada's acquisition of BlueBay Asset Management in October 2010; Bank of Nova Scotia's acquisition of Five Continents Financial Ltd (Cayman Islands) in 2009; Bank of Montreal's acquisition of a 19.99% interest in COFCO Trust Co. (China) in August 2012; Bank of Montreal's acquisition of Lloyd George Management (Hong Kong) in April 2011; Toronto Dominion Bank's proposed acquisition of Epoch Investment Partners (United States); Canadian Imperial Bank of Commerce's acquisition of the private wealth division of MFS McLean Budden in August 2012; and Canadian Imperial Bank of Commerce's acquisition of a 41% equity interest in American Century Investments (United States) in August 2011.

The continuation of this activity is further supported by the fact that the big six Canadian banks are expected to remain well capitalized in 2013 with high levels of liquidity and readily accessible funding in the Canadian capital markets at extremely low rates as compared to global standards. With existing global economic uncertainty, continuing risks from financial markets and the European debt crisis – all coupled with the requirement of foreign financial institutions to sell non-core assets – the pace of deals by Canadian financial institutions, domestically and abroad, will remain robust in 2013.

Canada's pension funds

Over the past few years, many of Canada's largest pension funds have responded to the volatility of the global stock markets and continued low interest rates by broadening their investment approach which has resulted in increased activity outside of Canada. Canada's pension funds will continue to venture outside the tradition of long-term conservative investments in 2013 with large scale and diversified investments. There will be an emphasis on alternative asset classes, including real estate, natural resources and infrastructure projects, the last of which may deserve special mention. In this period of debt-laden cities, states and countries, some argue large Canadian pension funds are uniquely situated to continue to realize on opportunities in the infrastructure space given their perceived "political independence" and the resulting competitive advantage this gives them over buyers such as sovereign wealth funds. Examples of such investments include: Ontario Teachers' Pension Plan's investment in the Sydney Desalination Plant (Australia); the High Speed 1 railway link (England); the Essbio and Esval water utilities (Chile) and in the Birmingham and Bristol Airports (UK), the Copenhagen Airport (Denmark) and the Brussels Airport (Belgium); OMERS Private Equity's investment in V.Group Limited (UK), and in United States Infrastructure Corporation, and Ontario Municipal Employees Retirement System's investment in real estate assets like the Metro Toronto Convention Centre (Canada) and Green Park (UK) through Oxford Properties Group; CPP Investment Board's investment in Gassled gas transport infrastructure (Norway), CPP Investment Board's investment in AMP Capital Retail Trust (Australia) and CPP Investment Board's proposed investment in Kista Galleria Shopping Centre (Sweden).

We expect this trend of investment outside Canada to continue in 2013, with more direct investment abroad initiated by the leading Canadian pension funds, including through joint ventures with established local partners and in partnership with other leading private equity funds. We also expect to see a continuation of the trend towards consolidation, internalization and globalization of management functions at big pension funds in 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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